Internet Tax Bill Heats Up Debate

Utah Gov. Michael Leavitt (R), recently inducted as the chairman of the National Governors' Association, said he is against a permanent ban on Internet sales taxes.

By Steve LeSueur

The chairman of the National Governors' Association has come out swinging against legislation introduced in Congress last month to permanently ban new Internet sales taxes, calling the plan a radical departure from a tradition that allows state and local governments to determine their tax policies.

"I fail to see a need for additional legislation while we're trying to deal with this problem," said Utah Gov. Michael Leavitt (R), who took over the NGA reins in August, in a wide-ranging interview last week.

"It's fundamentally bad tax policy to treat one method of selling different from another. The Internet doesn't need any special privileges," Leavitt told Washington Technology.

Leavitt's position appears at odds with that of another influential colleague, Virginia Gov. James Gilmore (R), who views more favorably the legislation introduced Sept. 22 by presidential hopeful John McCain, R-Ariz., now in his third term in the Senate.

Both Leavitt and Gilmore sit on a federal advisory panel that is exploring the issue of Internet taxation at the behest of Congress. Gilmore is the chairman of the 19-member Advisory Commission on Electronic Commerce, which was created in October 1998 as part of the Internet Tax Freedom Act. That act placed a three-year moratorium on new Internet access taxes while the commission grapples with Internet tax policy.

Gilmore, who has adopted a neutral stance in the debate, said McCain's legislation should be given serious consideration.

"Public policies should work to promote the Internet's growth, not stifle it with burdensome regulations," he said in a Sept. 23 statement.

But Leavitt said the McCain bill "is a radical departure from the tradition of our country" that allows state and local governments to set their tax policies.

Leavitt is nonetheless "optimistic" that the advisory group can recommend a workable and fair tax plan for collecting state and local taxes on Internet transactions.

Leavitt acknowledged that the current tax system would place an intolerable burden on remote sellers, such as Internet and catalog businesses, if they were forced to collect sales taxes for the thousands of state and local U.S. jurisdictions.

Under Leavitt's direction, the NGA has established a task force, called the Zero Burden Group, to develop a simplified tax regime that would ease the collection process. The task force also is examining how new software applications can reduce the burden to sellers by calculating instantaneously the applicable sales taxes in every ZIP code.

"We're looking for solutions that would place no burden, or relatively no burden, on the seller," Leavitt said.

Gilmore has pledged to work to ensure that all sides in the debate are heard. Other notable members of the advisory panel, whose members are drawn from the public and private sectors, include Gov. Gary Locke (D) of Washington; Michael Armstrong, chief executive officer, AT&T; John Sidgmore, vice chairman, MCI WorldCom; and Dallas Mayor Ron Kirk.

The commission already has held two general meetings and will hold two more before submitting its recommendations to Congress in April 2000.

Commissioners, including Leavitt, appear to agree that governments should not tax access to the Internet, and so the main questions center on sales taxes: Should online purchases be subjected to the same sales taxes as purchases made at traditional brick-and-mortar stores, and if so, how should those taxes be collected and administered?

Many state and local government officials fear that the growing Internet economy will erode the tax revenues that sustain basic government services, such as schools, roads and highways. At the same time, they worry that their downtown stores will suffer and perhaps go bankrupt because consumers will flock to the tax-free online businesses.

Opponents of Internet taxes contend that government fears of revenue loss are exaggerated. When introducing his legislation, McCain cited an Ernst & Young LLP study that said approximately 80 percent of commerce is business-to-business sales that either are not subject to sales and use taxes, or are effectively subject to use tax payments by in-state business purchasers.

In addition, 63 percent of e-commerce sales are for intangible services, such as travel and financial services, or exempt products, such as groceries and prescription drugs, which are not subject to tax in most states.

State and local governments lost only an estimated $170 million in potential sales taxes in 1998, one-tenth of 1 percent of total sales and use taxes collected by all state and local governments, according to the study, "The Sky Is Not Falling: Why State and Local Revenues Were Not Significantly Impacted By The Internet in 1998."

"The nearly infinitesimal effect on local revenues is not causing a financial crisis for either states or local communities," McCain said.

He acknowledged the work of the commission, but said he wanted to place the burden of proof on those advocating taxation of e-commerce. "This bill confirms that the right answer is to not tax unless there is a good reason to, and unless there is a fair mechanism for doing so," he said.

At the commission's second meeting in New York last month, the Information Technology Association of America released a survey showing that 34 percent of American voters would be less inclined to make mail-order or Internet purchases if companies were required to collect sales taxes on purchases. The survey also found that a majority of those polled were opposed to taxing Internet purchases.

"If one-third of Internet and mail-order buyers were suddenly to change their purchasing habit, I think we would see a backlash that could dampen both federal and state income tax receipts and damage the current technology-driven economic boom," said Harris Miller, president of the Arlington, Va.-based association that represents 11,000 members throughout the United States.

Leavitt, however, said Internet growth would not be weakened by the imposition of sales taxes. "I don't think anyone can seriously argue that anything can stand in the way of electronic commerce," he said. At the September meeting in New York, the federal Advisory Commission on Electronic Commerce voted to examine solutions offered by the National Governors' Association and other organizations for creating a fair and simple Internet tax plan.

The commission said the proposed solutions must strive to accomplish the following:

?Radically simplify the existing system of sales tax collection;

?Produce no new taxes;

?Remove burdens on remote sellers;

?Protect the privacy of purchasers;

?Respect state sovereignty;

?Provide for purchaser transparency, meaning that the tax policy should be the same for over-the-counter, Internet and mail order purchases;

?Not discriminate against out-of-state or remote vendors;

?Protect against oppressive audits;

?Be capable of being scaled to the international level.

In addition to the NGA, associations representing county and city governments are expected to weigh in with recommendations that meet these criteria.

Many are hopeful that advanced technology can ease the burden of collecting taxes over the Internet. At the first meeting of the Zero Burden Group last month in Atlanta, information technology companies demonstrated software applications that can calculate sales taxes instantaneously for a business.

One of those, IBM Corp. of Armonk, N.Y., has designed an application called Global Merchant for the Lego Group of Billund, Denmark, that calculates the value-added tax in Europe and the United States.

The tax is calculated for customers when they order online so that they will know the total price they must pay.

Taxware International Inc. of Salem, Mass., has developed a similar application for state and local taxes.

Utah Gov. Michael Leavitt said he was encouraged by the demonstration he saw, but simplifying the tax codes is still an important part of the solution.

The Zero Burden Group meets again Oct. 14 and 15, and intends to get a report by Nov. 1 for the governors to review, said Frank Shafroth, director of state federal relations for the NGA and a member of the task force.

The governors' association will make its recommendations at the commission's third meeting Dec. 14 and 15 in San Francisco.

"The majority of the states support Leavitt's initiative," said Shafroth.